TOKYO, April 26 (Reuters) - Honda Motor Co Ltd and
Mazda Motor Corp expect to post vastly higher profits
this financial year as they take advantage of export-friendly
currency moves, but will face a fresh challenge: high costs of
expansion.

The Japanese carmakers, which on Friday both reported
significant profit rises in the final quarter of the last
business year, are cranking up the pressure on foreign rivals
including South Korea's Hyundai Motor Co, which this
week logged a 15 percent drop in profits.

"We are investing a huge amount, especially in new plants
... the reality is that such costs related to growth are eating
into our vehicle volume growth," Honda Executive Vice President
Tetsuo Iwamura told reporters.

The third biggest-selling Japanese automaker plans 700
billion yen of capital spending in the current financial year,
up 18 percent from the previous year, and targets annual
worldwide car sales of 6 million by end-March 2017 compared with
a record 4.01 million in the year ended this March.

Its smaller rival Mazda, for years hammered by a strong yen
because it makes most of its vehicles in Japan and ship about 80
percent of them overseas, is now in a position as an export-led
company to cash in on the weakening yen which is advantageous
for margins on Japan-made goods sold abroad.

Mazda, which expects the United States, Europe and China to
underpin sales growth of 8 percent in this year, will almost
double capex to 130 billion yen.

Honda is focusing on emerging markets and small cars for its
growth, and is expanding capacity to thrust into those areas.

It is spending 44.6 billion yen to build a new plant in
Thailand that will fire up in 2015. This year it will add an
extra line at a factory in Malaysia, start operations at Yorii
in Japan and then open a new works in Mexico in 2014.

These moves have required heavy capital spending and will
also mean high start-up costs. Koichi Sugimoto, an auto analyst
at BNP Paribas in Tokyo, estimated Honda would face an expansion
bill of 20-30 billion yen this year alone.

Honda posted January-March profits that were up by 6.6
percent year-on-year, helped by strong sales of its Accord sedan
in the United States, its biggest market, though that increase
undershot market expectations of a plus-30 percent profit rise.

Net profit for the year ended March was up 73.6 percent to
367.15 billion yen ($3.69 billion),

MAZDA BACK IN PROFIT

The Honda and Mazda expansion pushes stand in contrast to
compatriot Toyota Motor Corp, which insists it wants
"sustainable" growth. The world's best-selling carmaker, which
releases its fourth-quarter figures on May 8, does not plan to
build any new plants over the next three years.

Honda is up roughly 20 percent and Toyota nearly 35 percent
this year, while Mazda, whose shares are up almost 90 percent,
turned a net profit for the first time in five years.

The company made net profit of 34.3 billion yen in the year
ended March, up from a 107.7 billion yen loss in the previous
year, according to results also published on Friday.

Both firms released their results after the Tokyo share
market closed.

Underlining a generally positive outlook in the Japanese
vehicle industry, Fuji Heavy Industries Ltd, which
makes Subaru cars, expects to book record annual operating
profit of 120 billion yen for the year ended in March, more than
double last year's figure.

Also on Friday Denso Corp, the world's second
biggest auto parts supplier and a key indicator of the health of
the vehicle market, said its operating profit for the current
financial year would rise 8.6 percent from last year.

The yen has lost around 15 percent of its value
versus the dollar since January, raising expectations of
stronger performance at Mazda, but any turnaround will not be
immediate, given that the company hedges currency trades six
months ahead.

"The current depreciation of the yen will really come into
effect for Mazda in the second half of the year ... The company
is certainly benefiting from the yen, but that may not be as
much as the market expects," BNP Paribas' Sugimoto said.